Top 7 forex trading strategies for beginners
Trading forex as a beginner can be daunting – and you may be looking for a suitable plan to get started. Check out this helpful guide on the seven most popular forex trading strategies.
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Forex trading basics for beginners
When you’re new to forex trading, you’ll have to do quite a bit of research about how the FX market works. Forex trading basics include understanding currency pairs, deciding how to trade FX, creating your strategy and managing your risk. You’ll also need to establish your trading style – be it day trading, swing trading scalping. There’s also position trading, but this style is more suited to long-term trading, not forex.
Being a beginner in forex trading doesn’t necessarily mean you’re just starting out, though. You may have already placed a few trades, but now need a tested forex trading strategy to help you along. Read on to discover seven forex trading strategies for beginners.
Top seven forex trading strategies for beginners
- Trend trading strategy
- Range trading strategy
- Breakout trading strategy
- Momentum trading strategy
- News trading strategy
- Carry trade strategy
- MACD trading strategy
Note that, while these aren’t necessarily the best forex day trading strategies for beginners, they are some of the more popular choices. We’ll cover the basics of each forex trading strategy below and you can read more by following the links in every section.
Trend trading strategy
A trend trading strategy is probably one of the most widely used approaches in forex trading. It involves using technical indicators to identify the direction of market momentum and going long or short accordingly.
The basic premise of this trading strategy is that forex markets are often expected to behave in a certain way – and historical trends and movements can help with future forecasts. However, it’s still important to have a solid risk management strategy in place as past performance of a currency pair is not a guarantee of any future price movements.
Moving averages find the price of a forex pair over a given timeframe, creating a smoothing effect on the data and producing a single trend line for traders to follow.
There are different types of MAs, namely simple moving averages (SMAs) and exponential moving averages (EMAs). An SMA is a straightforward calculation of the mean price of a set of values over a given time period, while an EMA gives more importance to recent prices – making the data more responsive to new information.
Relative strength index
Relative strength index considers the average gains and losses over a certain number of periods to establish whether the price movements were positive or negative. This means it can be used to identify momentum in prices and overbought or oversold signals.
Average directional index
Average directional index can help to determine the strength of an upward or downward forex price trend. The indicator line will move between zero and 100, with anything above 25 indicating a strong trend. The higher the number, the stronger the trend.
Range trading strategy
A range trading strategy is quite popular among beginners, as it’s one of the less elaborate plans. When a market consistently moves between two price levels, it’s considered to be in a ‘range’. Within that range, you could then identify certain upward or downward trends.
When using this strategy, you’ll go long or short depending on the position of the price within that specific range – long in a rising trend and short in a falling one. This can happen in any timeframe, both short and long term.
You can either place trades manually within this range or set stop losses and limit orders. Below you’ll see the two lines (support and resistance) that represent the range, as well as possible levels for stops and limits.
Breakout trading strategy
Breakout trading in forex is a top strategy for many traders because it enables them to take a position at the start of a volatile period. Forex traders are often partial to heightened volatility as it offers more trading opportunities.
A ‘breakout’ is when the currency pair’s price will suddenly move out of a consolidated range (ie out of levels of support and resistance). This strategy involves opening your FX position very early within the new trend and placing your stop-loss at the point the market broke out.
Momentum trading strategy
Momentum trading focuses on the strength of a trend, not just the trend itself. This strategy is based on the notion that if a trend is strong enough, it will continue in the same direction (either upward or downward).
If you want to use this strategy, you’ll open your position when the trend gains momentum and close it when the trend starts to slow down. To determine momentum, you need to consider volume, volatility and timeframes.
Indicators popularly used for this strategy are the momentum indicator, RSI, MAs and the stochastic oscillator.
Lastly, market sentiment plays a big role in momentum. News and economic events, like interest rate announcements, can heavily influence forex prices. Often, a large number of traders enter the market when a trend is growing stronger – which means even more momentum.
News trading strategy
Trading the news is an age-old strategy that can still be applied to your forex positions. There are different types of news events that can cause a currency pair’s price to spike or to take a fall, for example an election. Below you’ll see the effect of the 2020 US election on the price of EUR/USD.
If you’re interested in a specific currency pair, make sure you follow the calendar events that relate to those currencies. If you want to trade the EUR/USD, as mentioned here, you need to follow American and European interest rates announcements, monetary policy changes, elections and more.
It’s also important to note that political and economic news events can cause even more volatility in an already volatile forex market. Never lose sight of your risk management plan.
Carry trade strategy
The aim of this strategy is to help you profit from the interest rate differential between two currencies in a forex pair. There are two currency carry trading strategies: positive and negative. The first involves borrowing a currency with a low interest rate and buying a currency with a high interest rate. A negative currency carry trade works in the opposite way.
Because you’ll pay interest on the position until the interest rate on the base increases over that of the quote, your outcome will be different for positive and negative carry trades. Positive carry trades result in an initial net gain with a potential net loss, and negative carry trades result in an initial net loss with a potential net gain.
MACD trading strategy
MACD – short for moving average convergence divergence – aids in finding the end of one trend and the start of another. This strategy might be useful for you if you’re a beginner forex trader that knows their way around indicators quite well. Three parts make up this indicator: the MACD line, signal line and histogram.
The MACD line is created by subtracting the 26-period moving average from the 12-period moving average, and the signal line is the 9-period moving average. The MACD is displayed as a histogram (formed by the lines crossing through each other). If the MACD line (blue) crosses above the signal line (red), it’s considered a ‘buy’ signal. If the opposite is true, it’s a 'sell' signal.
How to start trading forex as a beginner
Follow these steps if you’re a beginner and you want to start trading forex:
- Understand what forex trading is and how the FX market works
- Build a trading plan and stick to it
- Open a trading account with us
- Pick a forex pair and open your first position
Need more information or want to learn even more? Check out IG Academy – you’ll find free online courses to help you hone your forex trading skills. You can also run through your forex trades on our demo account, where you’ll get £10,000 in virtual funds to practise in a risk-free environment.
Forex trading strategies for beginners summed up
- Forex trading basics include understanding currency pairs, establishing your trading style, deciding how to trade FX, creating your strategy and managing your risk
- A trend trading strategy involves using technical indicators to identify the direction of market momentum
- With a range trading strategy, you’ll identify whether currencies are trading within a specific price span and then go long or short, depending on the position of the price within that range
- A breakout trading strategy means opening your FX position very early within a new trend and placing your stop-loss at the point the market broke out
- The aim of the momentum trading strategy is to open your position when the trend gains momentum and close it when the trend starts to slow down
- A news trading strategy is one where you’ll follow noteworthy political and economic events to see what impact they have on a currency pair’s price
- The aim of the carry trade strategy is to help you profit from the interest rate differential between two currencies in a forex pair
- The MACD trading strategy uses moving average lines to determine possible buy or sell signals
- To start trading forex if you’re a beginner, learn as much as you can about forex and then open a demo account with us to start practising
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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